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Chapter12-PP1.pptxStrategic Performance Measurement
Chapter 12
Managerial Accounting
Seventeenth edition
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The Balanced Scorecard – From Strategy to Performance Measures
Financial
Has our financial performance improved?
Customer
Do customers recognize that we are delivering more value?
Internal Business Processes
Have we improved key business processes so that we can deliver more value to customers?
Learning and Growth
Are we maintaining our ability to change and improve?
Performance Measures
What are our financial goals?
What customers do we want to serve and how are we going to win and retain them?
What internal busi- ness processes are critical to providing value to customers?
Vision and Strategy
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Learning Objective 1
Identify examples of performance measures that are appropriate for each of the four balanced scorecard categories
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The Balanced Scorecard
Management translates its strategy into performance measures that employees understand and influence.
Customer
Learning and growth
Internal business processes
Financial
Performance measures
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Learning and Growth Performance Measures
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Internal Business Process Measures
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Customer Measures
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Financial Measures
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The Balanced Scorecard – Financial v. Nonfinancial Measures
The balanced scorecard framework rejects the notion that improving process-oriented measures automatically leads to financial success
Including a financial perspective serves the purpose of holding organizations accountable for translating improvements in nonfinancial performance to “bottom-line” results
If favorable trends in a company's learning and growth, internal business processes, and customer measures do no translate to financial results, the balanced scorecard is designed to force the organization to re-examine its strategy for differentiating itself from competitors.
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Learning Objective 2
Identify the four types of quality costs and use them to create a quality cost report.
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Quality of Conformance
When the overwhelming majority of products produced conform to design specifications and are free from defects.
Costs incurred to prevent defects or that result from defects in products are known as quality costs. Many companies are working hard to reduce their quality costs.
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Prevention and Appraisal Costs
Prevention Costs
Support activities whose purpose is to reduce the number of defects
Appraisal Costs
Incurred to identify defective products before the products are shipped to customers
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Internal and External Failure Costs
Internal Failure Costs
Incurred as a result of identifying defects before they are shipped
External Failure Costs
Incurred as a result of defective products being delivered to customers
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Examples of Quality Costs
Prevention Costs
Quality training
Quality circles
Statistical process
control activities
Appraisal Costs
Testing and inspecting
incoming materials
Final product testing
Depreciation of testing
equipment
Internal Failure Costs
Scrap
Spoilage
Rework
External Failure Costs
Cost of field servicing and
handling complaints
Warranty repairs
Lost sales
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Quality Cost Reports
Quality cost reports provide an estimate of the financial consequences of the company’s current defect rate.
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Uses of Quality Cost Information
Help managers see the financial significance of defects.
Help managers identify the relative importance of the quality problems.
Help managers see whether their quality costs are poorly distributed.
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Limitations of Quality Cost Information
Simply measuring and reporting quality cost problems does not solve quality problems.
Results usually lag behind quality improvement programs.
The most important quality cost, lost sales, is often omitted from quality cost reports.
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Learning Objective 3
Understand how to calculate throughput (manufacturing cycle) time, delivery cycle time, manufacturing cycle efficiency (MCE), and overall equipment effectiveness (OEE)
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Process time is the only value-added time.
Operating Performance Measures – Part 1
Wait Time
Process Time + Inspection Time + Move Time + Queue Time
Delivery Cycle Time
Order Received
Production Started
Goods Shipped
Throughput Time
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Manufacturing
Cycle
Efficiency
Value-added time Manufacturing cycle time
=
Operating Performance Measures – Part 2
Wait Time
Process Time + Inspection Time + Move Time + Queue Time
Delivery Cycle Time
Order Received
Production Started
Goods Shipped
Throughput Time
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Operating Performance Measures – Part 3
Overall Equipment Effectiveness (OEE)
Measures the productivity of a piece of equipment in terms of three dimensions—utilization, efficiency, and quality.
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Quick Check 6
A TQM team at Narton Corp has recorded the following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.
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Quick Check 6a
A TQM team at Narton Corp has recorded the following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.
Throughput time = Process + Inspection + Move + Queue
= 0.2 days + 0.4 days + 0.5 days + 9.3 days
= 10.4 days
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Quick Check 7
A TQM team at Narton Corp has recorded the following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
c. 13.4 days.
d. 10.4 days.
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Quick Check 7a
A TQM team at Narton Corp has recorded the following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
c. 13.4 days.
d. 10.4 days.
DCT = Wait time + Throughput time
= 3.0 days + 10.4 days
= 13.4 days
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Quick Check 8
A TQM team at Narton Corp has recorded the following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%.
b. 1.9%.
c. 52.0%.
d. 5.1%.
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Quick Check 8a
A TQM team at Narton Corp has recorded the following average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%.
b. 1.9%.
c. 52.0%.
d. 5.1%.
MCE = Value-added time ÷ Throughput time
= Process time ÷ Throughput time
= 0.2 days ÷ 10.4 days
= 1.9%
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Quick Check 9
Narton Corp has provided the following information for a machine whose limited capacity is prohibiting the company from producing and selling additional units:
Actual run time this week 4,550 minutes
Machine time available/week 6,500 minutes
Actual run time this week 3.8 units per minute
Ideal run rate 6,500 minutes
Defect-free output this week 16,000 units
Total output this week (including defects) 17,290 units
What is the machine’s OEE?
a. 50.3
b. .615
c. .984
d. 1.7
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Quick Check 9a
Narton Corp has provided the following information for a machine whose limited capacity is prohibiting the company from producing and selling additional units:
Actual run time this week 4,550 minutes
Machine time available/week 6,500 minutes
Actual run time this week 3.8 units per minute
Ideal run rate 6,500 minutes
Defect-free output this week 16,000 units
Total output this week (including defects) 17,290 units
What is the machine’s OEE?
a. 50.3
b. .615
c. .984
d. 1.7
Utilization rate: .70 (4,550 minutes ÷ 6,500 minutes)
Efficiency rate: .95 (3.8 units per minute ÷ 4 units per minute)
Quality rate: .925 (16,000 units ÷ 17,290 units)
OEE: .615 ( .70 × .95 × .925)
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Learning Objective 4
Understand how to construct and use a balanced scorecard.
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Selecting Balanced Scorecard Measures
The four categories of a balanced scorecard are interrelated to one another.
A company’s employees need to continuously learn and grow in order to improve internal business processes
Improving business processes is necessary to improve customer satisfaction
Improving customer satisfaction is necessary to improve financial results.
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The Balanced Scorecard – Jaguar Example
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The Balanced Scorecard – Jaguar Example – Part 2
In essence, the balanced scorecard lays out a theory of how the company can take concrete actions to attain its desired outcomes (financial, in this case)
Jaguar’s strategy seems plausible, but it should be regarded as only a theory.
One of the advantages of the balanced scorecard is that it continually tests the theories underlying management’s strategy
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Tying Compensation to the Balanced Scorecard
Incentive compensation should be linked to balanced scorecard performance measures
Managers must be confident that the performance measures are reliable, sensible, understood by those who are being evaluated, and not easily manipulated.
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Corporate Social Responsibility Performance Measures
Many of the world’s largest companies prepare corporate social responsibility performance reports (also called sustainability reports) that are shared with their external stakeholders.
The Global Reporting Initiative (GRI) is a leading organization in the field of social and environmental performance measurement
Corporate social responsibility (CSR) is a concept whereby organizations consider the needs of all stakeholders when making decisions beyond those that produce financial results to satisfy stockholders
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Corporate Social Responsibility and the Balanced Scorecard
The balanced scorecard provides a useful framework for organizing and managing the types of social and environmental performance measures that companies often include in their sustainability reports.
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Corporate Social Responsibility and the Balanced Scorecard – Part 2
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End of Chapter 12
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Amount Percent* Amount Percent* Prevention costs:
Systems development 400,000$ 0.80% 270,000$ 0.54% Quality training 210,000 0.42% 130,000 0.26% Supervision of prevention activities 70,000 0.14% 40,000 0.08% Quality improvement 320,000 0.64% 210,000 0.42%
Total prevention cost 1,000,000 2.00% 650,000 1.30%
Appraisal costs: Inspection 600,000 1.20% 560,000 1.12% Reliability testing 580,000 1.16% 420,000 0.84% Supervision of testing and inspection 120,000 0.24% 80,000 0.16% Depreciation of test equipment 200,000 0.40% 140,000 0.28%
Total appraisal cost 1,500,000 3.00% 1,200,000 2.40%
Internal failure costs: Net cost of scrap 900,000 1.80% 750,000 1.50% Rework labor and overhead 1,430,000 2.86% 810,000 1.62% Downtime due to defects in quality 170,000 0.34% 100,000 0.20% Disposal of defective products 500,000 1.00% 340,000 0.68%
Total internal failure cost 3,000,000 6.00% 2,000,000 4.00%
External failure costs: Warranty repairs 400,000 0.80% 900,000 1.80% Warranty replacements 870,000 1.74% 2,300,000 4.60% Allowances 130,000 0.26% 630,000 1.26% Cost of field servicing 600,000 1.20% 1,320,000 2.64%
Total external failure cost 2,000,000 4.00% 5,150,000 10.30% Total quality cost 7,500,000$ 15.00% 9,000,000$ 18.00%
* As a percentage of total sales. In each year, sales totaled $50,000,000.
Year 2 Year 1
Quality Cost Report For Years 1 and 2
Sheet1
| Quality Cost as a Percentage of Sales | 20 | |||
| 18 | ||||
| 16 | External Failure | |||
| 14 | External Failure | |||
| 12 | ||||
| 10 | ||||
| 8 | Internal Failure | |||
| 6 | Internal Failure | |||
| 4 | Appraisal | |||
| 2 | Appraisal | |||
| 0 | Prevention | Prevention | ||
| 1 | 2 | |||
| Year |
Sheet2
| Quality Cost Report For Years 1 and 2 | ||||||
| Year 2 | Year 1 | |||||
| Amount | Percent* | Amount | Percent* | |||
| Prevention costs: | ||||||
| Systems development | $ 400,000 | 0.80% | $ 270,000 | 0.54% | ||
| Quality training | 210,000 | 0.42% | 130,000 | 0.26% | ||
| Supervision of prevention activities | 70,000 | 0.14% | 40,000 | 0.08% | ||
| Quality improvement | 320,000 | 0.64% | 210,000 | 0.42% | ||
| Total prevention cost | 1,000,000 | 2.00% | 650,000 | 1.30% | ||
| Appraisal costs: | ||||||
| Inspection | 600,000 | 1.20% | 560,000 | 1.12% | ||
| Reliability testing | 580,000 | 1.16% | 420,000 | 0.84% | ||
| Supervision of testing and inspection | 120,000 | 0.24% | 80,000 | 0.16% | ||
| Depreciation of test equipment | 200,000 | 0.40% | 140,000 | 0.28% | ||
| Total appraisal cost | 1,500,000 | 3.00% | 1,200,000 | 2.40% | ||
| Internal failure costs: | ||||||
| Net cost of scrap | 900,000 | 1.80% | 750,000 | 1.50% | ||
| Rework labor and overhead | 1,430,000 | 2.86% | 810,000 | 1.62% | ||
| Downtime due to defects in quality | 170,000 | 0.34% | 100,000 | 0.20% | ||
| Disposal of defective products | 500,000 | 1.00% | 340,000 | 0.68% | ||
| Total internal failure cost | 3,000,000 | 6.00% | 2,000,000 | 4.00% | ||
| External failure costs: | ||||||
| Warranty repairs | 400,000 | 0.80% | 900,000 | 1.80% | ||
| Warranty replacements | 870,000 | 1.74% | 2,300,000 | 4.60% | ||
| Allowances | 130,000 | 0.26% | 630,000 | 1.26% | ||
| Cost of field servicing | 600,000 | 1.20% | 1,320,000 | 2.64% | ||
| Total external failure cost | 2,000,000 | 4.00% | 5,150,000 | 10.30% | ||
| Total quality cost | $ 7,500,000 | 15.00% | $ 9,000,000 | 18.00% | ||
| * As a percentage of total sales. In each year, sales totaled $50,000,000. |
